How to trade forex

Trading basics

Compared to other financial markets, the forex market does not have a central exchange or a physical location. It operates 24 hours a day via a global network of banks, businesses and individual traders. This means, currency exchange rates fluctuate in value against one another around the clock, offering multiple trading opportunities to capitalize on.

More on forex trading

Start trading forex in 6 steps

1. Pick your currency pair
Choosing which currency pairs to trade is the first decision you will have to make as a forex trader. At ThinkMarkets, we offer a wide selection of major, minor and exotic pairs to select from. New traders tend to start with currencies they are familiar with before moving on to finding opportunities in currencies they have less exposure to.

2. Determine the type of forex trade to perform
There are several ways to trade with us. These include CFDs or spread betting.

CFD trading - You trade a specific number of CFD contracts in base currency units. If you opt to trade EUR/USD, for example, your investment is in Euro. On the other hand, if you are trading USD/JPY, it is in US dollars.

Spread betting (available for UK citizens only) – You trade currency pairs for every point movement, which is typically the fourth decimal point.

3. Decide whether to buy or sell
After choosing your market, you have to determine the current trading price and the direction in which you think the market is going to move. Forex pairs are quoted as one currency (base currency) versus another (quote currency), therefore:

- If you think the base currency will strengthen against the quote currency or the quote will decline versus the base, you buy the pair.

- If you think the base currency will weaken against the quote or the quote will appreciate versus the base, you sell.

Each currency pair has two prices. The first is the bid or sell price, while the second is the ask or buy price. The difference between the two quoted prices is the spread, which is your trading cost.

4. Add orders
An order is an instruction to trade automatically at a future time when exchange rates meet a particular pre-determined level. Stop-loss and limit orders are used to make sure that profits are locked in and losses are minimized.

5. Monitor your trading position
In an open position, your profit and loss (P&L) fluctuates with each market price movement. That’s why it’s important to monitor your P&L in real time. This way, you can easily add or close trading positions when necessary.

6. Close your trading position
Closing a trade is similar to opening a position. If you initially bought 5 units, you need to sell the same number of units upon closing. When you close a trade, your profits and losses are reflected right away in your trading account.

Are you ready to trade forex live?

Forex trading examples

To help you better understand how forex trading works, here are a couple of forex trading examples.

Every month, the economic calendar is filled with economic events. One of the most highly anticipated bits of news is the release of the NFP or Non-Farm Payroll figures. It is reported by the US Bureau of Labor Statistics on a monthly basis, offering traders valuable insight into the performance of the US economy.

Going long (buying) EUR/USD

Here’s an example of a long trade. The US job market seems to stall. You think the level of the Non-Farm Payroll (NFP) will be below the estimates of analysts and expect the US Dollar to weaken against the Euro. For that reason, you decide to buy 1 Lot ($100,000) of EUR/USD at 1.2101, which corresponds to a $10 stake per pip movement.

The report is released and the NFP headline number prints weaker than the experts estimated, causing the US dollar to slump. The EUR/USD pair now trades at 1.2152 and you decide to close the position. You opened the trade at 1.2101 and sold at 1.2152. The difference of 51 pips is your profit ($510).

EUR/USD trading example (long)

Going short (selling) USD/JPY

Here’s an example of a short trade. Remember when we said that it is the fourth decimal point we use to calculate profit and loss? Pairs that include the Japanese Yen (JPY) are the exemption to the rule. Here we look at the second decimal instead.

Let’s assume that you open the USD/JPY 1 hour chart looking for trading opportunities early in the morning. The pair is trading at 113.63 and your technical indicators suggest a high probability for the market to move lower.

You sell 1 mini lot ($10,000), which corresponds to a $1 stake per pip movement. This time you decide to add stop-loss and take-profit orders to your position, so that your risk is managed while you are at work. You set your take-profit at 114.24 and the stop-loss at 113.27.

USD/JPY trading example (short)

You are back from the office and straight to your account to check what happened with your position. Your account balance is up by $61. The market moved lower, triggering the take-profit and cancelling the stop-loss.

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